How Does Regulatory Capital Requirement Impact a Market Maker’s Ability to Increase Quote Size after High Fill Rates?

Regulatory capital requirements impose limits on the total risk a market maker can hold, often based on their value-at-risk (VaR) or other stress tests. A high fill rate increases the market maker's inventory and risk exposure.

To increase quote size further, they must ensure they have sufficient regulatory capital allocated, or they risk breaching their capital limits.